Letting Markets Work

On September 12, Colonial Pipeline, which supplies gasoline and other petroleum products from Texas to New York, was shut down because of a leak. The leaking line supplies about 1.4 million barrels/ day to states from Tennessee to New Jersey.

The shutdown had a noticeable impact on gasoline supplies from Georgia to Virginia with spot outages reported in some states. The governors of those states were quick to make state of emergency declarations, which had the primary effect being to relax constraints on hours of work by tank truck drivers and restrictions on tanker truck size. The Governors also made obligatory political statements about not tolerating price gouging, an ill-defined concept.

The media as expected focused on price increases and stations that ran short of gasoline without giving much coverage to alternative sources of supply that minimized the disruption caused by the shutdown.

Suppliers of gasoline reacted by moving more gasoline by waterborne tankers to ports along the east coast and then using tanker trucks to resupply affected areas. Colonial also began to utilize a second pipeline that typically moved distillate fuel. Gasoline suppliers had a strong incentive to reallocate supplies from other areas to minimize shortages because of they were losing sales revenue from the pipeline shutdown.

Anytime there is a shortage of any product, its price increases. That is how supply and demand works. Price increases do two things. First, they bring demand in line with available supplies and second they create an incentive to increase. For those two reasons, railing against prospective “price gouging” is not in the consumers’ best interest.

The history of price and allocation controls in the 1970s demonstrates that when government attempts to manage markets, it makes problems worse and they last longer. Then drivers had to search for stations that had supplies, often relying on word of mouth or media reports. Today, information technology and a 24 hour news cycle allows motorists to quickly find stations and areas with available supplies.

Governors apparently had learned the lesson of the 70s and avoided the “do something” overreaction while letting markets work. The lesson for the future is that the best course of action for officials and the media is to inform the public with complete and accurate facts, the actions being taken to mitigate adverse impacts, avoiding political rhetoric, and giving market forces a chance to work.